Archív značiek: crisis

Barroso has declared victory

It was the week of central banks announcements. But frankly speaking nothing new has happened. ECB let rates unchanged and so to say the Bank of England.  Mario Draghi admitted that euro area growth is still under question and that we may expect prolonged period of low inflation. This brings us back to the question what kind of arms ECB will use in the future concerning inflation, support of economy and backing the back of some sovereign nations as Spain, Italy or Portugal which experiencing low rates on their sovereign bonds.

Unemployment of the Eurozone remains unchanged at 12.1 % as expected. The lowest rates are in Austria (4.8%), Germany (5.2%) and Luxembourg (6.1%), and the highest in Greece (27.4% in September 2013) and Spain (26.7%). The only surprise is that Spain youth unemployment is (probably because statistics from Greece are delayed) higher than Greece one and is at stunning 57.7%.

Thanks to God, José Barroso has declared victory again. The European Commission chief told that the eurozone crisis is finally over. Ireland has exited from rescue program and Latvia has joined the euro and is now the EU’s fastest growing country. Brisk future is before us. baroso

This is not the case for France. Their attempt to introduce 75 % tax was approved by constitutional court. But country is facing many problems caused by very extensive social policies. One example. Two managers of Goodyear Tire Company were captured by unions’ workers for more than 30 hours because union workers did not agree with the closure of the ineffective company. French workers have a history of holding managers captive. Companies including, 3M, Sony and Caterpillar were affected in 2009 as well. Generally workers have not been prosecuted for holding their bosses captive and according to the CGT union, the “two managers have been given water and still have their mobile phones”.

It seems that China Banking Regulatory Commission is full aware of the threats of shadow banking system which is estimated as 69 % of GDP of the country in 2012. China’s banking regulator told lenders to publish data including off-balance-sheet assets and interbank liabilities. Lenders with total assets of $264 billion or more must publish 12 indicators within four months of the end of each financial year. To watch China in 2014 will be worth of your time. Why? Because the new crisis trigger could come from this country.

Venezuela is experiencing tough times. It is 56 % official inflation rate in the country and government has introduced fixed prices for some products. The consequence of it is lack of everything. The story of an ordinary taxi driver of border town Maracaibo is very informative. He has to drive to Columbia to buy rise because he haven´t seen it in the shops since July. President Maduro solves problems with no food very clever. Maduro has urged citizens to abstain from “nervous buying” of imports, saying on state television Jan. 6 that “consumerism is an addiction that destroys the human being.” To be addict on food is a problem.

The most important but widely expected event from US was election of Janet Yellen as the first women president of the FED. Good by Ben and welcome Jannet but from the point of view of the policy of the FED has nothing changed apart from the fact that Yellen could be more pro stimulus oriented person as Bernanke. The minutes reveled that many FOMC members favored QE tapering in `measured steps’ and most participants were more confident in job market gains. Job market showed us decline in unemployment from 7 to 6.7 % but the economy creates only 75 k jobs pretty below 200 k expectations and labor force participation rate is the lowest since 1978.

ECB four-flush

We already know that ECB is prepared to use so called OMT mechanism to buy on secondary markets government bonds in trouble. The only thing we know is that ECB is prepared but close details were never revealed to public. But the rhetoric was so strong that markets calmed down for now. Lower interests’ rates have been introduced two weeks ago. This week some hidden sources from ECB have revealed that ECB is considering introducing negative rates for commercial lenders who park excess cash at the ECB to minus 0.1 percent from zero. It would be the first time the central bank has adjusted interest rates by less than a quarter of a percentage point. The true is that policy doesn’t yet have a consensus, the sources said. But I still think that it is more rhetoric than real policy decision. ECB has still some other option to intervene on markets as another round of LTRO, similar QE policy as we are witnessing in the US or direct forex interventions to which Czech central bank have decided two weeks ago.  So we will see. But European leaders must be a little bit desperate because this news are coming with another measure which simply put should decrease extensive public debts by new debts. Yes you are reading correctly. The European Union is allegedly considering whether it could encourage countries to make long-term economic changes by offering them loans at below-market rates. Loans would be more suitable for smaller countries which have more difficult access to market sources. The only positive news is that loans for reforms would not be available to countries running excessive macroeconomic imbalances or under bailout.blafovat_karty

Bundesbank gave noticed in the report from last week that southern European countries and their banking sector are still within the same vicious circle. According to Bundesbank Italian banks have increased their holdings of Italian public debt from €240bn to €415bn since November 2011 (+ 73pc). Spanish banks have raised their holdings of Spanish debt €166bn to €299. (+81pc) and Irish banks are up 60pc with Portuguese banks up 51pc. And we can only consider as one of the consequence apart of OMT mechanism why yields on sovereign debts still on sustainable levels are. But this state is not definitely sing of health banking system.  Still works but not too long.

The best example of “effectiveness of the EU” is definitely moving parliamentary sessions from Brussels to Strasbourg. It is such a good idea that also Members of the European Parliament are tired of the monthly move from Brussels to Strasbourg for a week of plenary sessions. France on the other hand vetoes any change. After MEPs tried to merge two plenary sessions into one week last year to cut down on traveling time, France took the case to the Court of Justice of the European Union. What do you think happened? They won. So now MP´s are trying to change their strategy. They proposed that MP´s should in future be allowed to choose the seat of their institution themselves – with no mention of Strasbourg or Brussels.  We will see if they succeed.

As we are always emphasizing it is not only about public debt. The extension of the debt of the whole western society is enormous. And public debt is only one part of it. It is very likely that much of private debt is not effective as well as public one.  The situation is very considerable in the UK. Total personal debt in the UK has reached record highs – 1.4 trillion pounds. It means that households owe 94 percent of the UK’s economic output last year and an average household debt is about 54,000 pounds. It is almost twice the level of a decade ago. What is also more dangerous indebted households in the poorest 10 percent of population have average debts more than four times their annual income. So it is not very surprising that more than 130K people declare personal bankruptcy each year.

Globally, 86% of companies do not plan to hire in 2014. It is the output from the global survey within 11,000 companies around the world. Only 33 % of them are optimistic about the economic future for next year. Among most optimistic are US companies because 41 % of them presuppose better economic conditions in 2014 and only 19 % of them stated that they are not plan to hire anybody in 2014.

As we mention many times in the past China is preparing to enter world currencies world. One of the evidence is its vast activities in currency swaps with many countries or alleged increasing of their official gold holdings. The another step within this policy was last week clarification what the People’s Bank of China is going to do. There are two interesting points. First PBOC said the country does not benefit any more from increases in its foreign-currency holdings. It means that bank will very probably rein in dollar purchases as well. The second is that China’s central bank will “basically” end normal intervention in the currency market and will increase the role of market exchange rates and broaden the yuan’s daily trading limit. So do we see the step by step rise of new reserve currency? From my point of view, yes.

FED´s minutes revealed the dispute among members of monetary committee that they are prepared to tapper their easy-money policy within a few coming months. I still do not believe to that because it is not only about the unemployment rate which is if not manipulated at least managed according to some allegations that the last unemployment report before election in 2012 was manipulated. It is also about the structure of unemployment which is very bad. But who knows. On the other hand Bernanke has said last week that if FED tappers the policy of low interest rates remains for a longer period of time. It is clear evidence that nothing has been changed and trillion of US dollars from FED does not really help to economy. Otherwise we will see at least speculation about higher interest rates which also Keynesians consider as a healthy state of economy.

Matúš Pošvanc

Financial and Natural Hurricanes

Haiya is the name for the biggest hurricane ever which was heading towards Filipinas this week. According to experts there is not almost nothing built on the Philippines that can withstand winds like that. We know natural disasters very well but do we heading into the some which are caused by men? Very probably yes. Monetary policies are the best example of these days’ potential catastrophes for human mankind. They are direct proof that nothing has changed since 2008. Otherwise we would have higher rates. As we wrote last week ECB finally cut the basic rates by 25 bps to historic lows and they will keep them unchanged for a longer period of time. The reasons behind were according to president Draghi low inflation expectations, risk of the growth remain downside as well as unemployment rate and ECB expects that Euro area will face prolonged period of low inflation if not deflation. The Bank of England unchanged its policy but surprisingly our brothers Czechs entered currency wars. Although CNB decided to keep interest rates unchanged it decides on interventions on the foreign exchange market to weaken the koruna so that the exchange rate of the koruna against the euro is hold close to CZK 27.huricane

“Today there is only one country and only one in command: Germany” said Romano Prodi last week. What Europe needs is according to him that ECB should fulfill its inflationary targets by 2 %. Prodi said that Italy is in trouble because of low inflation and that it is trapped in deflationary spiral. Italy has primary budget surplus but its debt to GDP ratio is still climbing due to the unsatisfactory nominal GDP growth. Prodi also urged for creation of “Latin front” against Germany. He claims that Germany is obsessed by low inflation as teenagers are obsessed by sex. There is nothing strange that some Italians claim for lowering of purchasing power of Euro. They did it with their currency before Euro all the time. But as we have emphasized many times these opinions are still stronger and I think that higher inflation times is slowly coming into the Europe; hopefully not end by the word “hyper”.

We had another whole country protests in Greece for 24 hours. Protests were taking place as Greece holds talks with its ‘troika’ of creditors. Labor unions were fear that politicians will impose another wage and pension cuts to meet the terms of the bailout and that they introduce more job cuts in the public sector, as well as privatization. But we are accustomed with these news and we will see more strikes in the near future. That is for sure.

China´s Premier Li Keqiang declared last week that China needs grow at least 7.2 percent annually to create 10 million jobs a year which is necessary for employment as one of the country´s priorities. His remarks were made at a union meeting two weeks ago but were only published in full this week, just days before a pivotal Communist Party plenum to set policy opens. He also warned on easy credit supply, which is about 100 trillion yuan ($16.4 trillion) what means that is already twice the size of China´s GDP. And new credit could cause inflation which is for Chines leaders’ dangerous game in one billion men country. Growth at the peace of 7.2 percent is quite ambitious plan because as we informed you many times China is suspicious to adjust official economic data. There is also news from time to time which supports this theory as for example the one from the last week. Chinese leaders called for stopping expanding industries such as steel and cement in which supply outstrips demand to cut overcapacity of these industries. And as data shows cement manufacturers use only 71.9 percent of their capacity from 2012 and the steel industry use only 72 percent. So as you can see the situation around the growth of GDP is at least cloudy. On the other hand everybody expects introduction of some reforms on their Third Plenum meeting in terms of industry deregulation, financial liberalization, and reforms to land titles, state-owned enterprises and social security. We will see what this meeting brings to the globe.

The most important data for this week from the US were non-farm payrolls. So October nonfarm payrolls soar to 204,000. It was a nearly double digit contrary to the expectations on 120,000. Unemployment rate in the US is at 7.3%, a little bit up from 7.2% in September. Does it mean that FED changes its policy in the near future? It is difficult to tell. But as the UBS warns FED is trapped. According to the UBS the Fed is facing two major risks. First is that premature tapering could disrupt markets and triggers global turmoil across all assets classes with consequence of weakening already weak economy. Second is that if FED delays tapering of its policy of 85 billion purchase program it will fuels creating of asset price bubbles, which could burst eventually and do major damage as well. So you can choose as usually what really happens. Maybe we will witness no tapering at all but increasing of QE. Who knows?

Matúš Pošvanc

They’ll leave again

So it happened. Finally. The recession is over. The 0.3 % growth is considered as the end of it. Not so hurry. Cautious is also Mari Draghi who said that he is very, very cautious about prospects for growth and added that Syria situation could lead to some geopolitical risks. The rates remain record low. Bank of England identically let rates record low (0.5%) and continued in purchases of bond on the same peace (375 billion £).

Greece definitely must cut spending. As you know there are rumors that Greece will need another 10 billion euro bailout and Troika is starting to be nervous. Andgreece_storm you need not be surprised when you hear stories like this. Dimitris Reppas, former minister for administration was once caught whispering to a fellow minister on a stage: „When the troika is here, always say yes, yes. They’ll leave again.“ One of the biggest tasks for the government is to decrease the number of public workers or stop subsidies to departments and more than 1000 organizations with no clear function. And Greece is full of them. One example is „Organization for Water Management in Certain Areas,“ which has exactly one employee and no one really knows what he does.

On the 27th of August, the project of the pension reform was finally presented by the French government. In spite of the protests of the trade unions and the syndicates, contributions would rise by 0.3 points in 2017. The government needs 7.6 billion to cover the gap in the pension system. By applying this step of the reform, it hopes to gain 4.4 billion euros. It means another growth of the expenses for the employees and the firms. Olli Rehn, the European commissioner for economic and monetary affairs, warns France before the rise of the taxes and the contributions. It could severely threaten the economic growth, but also the rate of the employment. The IMF shares the same opinion. It considers that the fiscal pressure has reached its limits in France.

Another bead example could be seen in Poland which will transfer to the state many of the assets held by private pension funds, slashing public debt. Private funds within the state-guaranteed system would have their bond holdings transferred to a state pension vehicle, but keep their equity holdings. As usually the devil is in the detail and it looks like pension funds will lose a lot of flexibility in what they can invest.

How to play with political cards on global scale? Here is suitable example. Russia agreed to restructure Cyprus’ EUR 2.5 billion loan terms to a much more affordable 2.5% from 4.5 %. Why? It looks like Russia buys some influence in the area very close to Syria. Because consequently Cyprus´ Foreign Minister Ioannis Kasoulides assured that its territory won’t be used to launch military strikes against Syria.

Belong to the EU trade bloc or not to be a part? That was the question for Armenia. Surprisingly Armenian President Serzh Sargsyan has said he wants to join a trade and political union with Russia instead of an EU alternative. It is probably more political decision but frankly speaking to accept all trade conditions with EU would not be best choice too because of quite excessive regulatory environment.

We are probably heading into the state of multi reserve currencies world. China will very probably allow unfettered exchange of its yuan currency in its first free trade zone. If you still believe that economic data from China are correct you should read this. China’s National Bureau of Statistics announced that it had uncovered a serious case of faking of economic data by a county government in southwest China’s Yunnan Province. The government of the Yunnan province had forced local companies to report higher industrial outputs, resulting in artificially high economic figures. E.g. in 2012 Yunnan province reported CNY6.34 billion in output while audits showed only CNY 2.82 billion and in the first half of 2013, Yunnan published CNY 2.75 billion output while audits showed a mere CNY1.06 billion. China is a real economic wonderland.

Syria is still on the radar of all investors and media. Senate Foreign Relations Committee voted for limited authority for the president to use force in Syria. China and Russia is definitely against any intervention. So we will see what happens because UN approval is very unlikely. US jobs data were under expectations but unemployment rate decline to 7.3% from 7.4 %. I think that this data are not very supportive for tapering of the present FED´s policy but there is still possibility for this step. On the other hand Federal Reserve Bank of Minneapolis President Narayana Kocherlakota said that FED should provide more stimuli to the economy, not less. So till September 17-18th FOMC meeting we cannot be sure. But my bet is that the FED will continue with the $85 billion in monthly bond buying program.

Matúš Pošvanc

War against Gold

indian_warThe war against gold continued in India. Many Indian customers find out this week that it is no longer possible to purchase gold by credit card. The Reserve Bank of India is leaving no stone unturned to discourage gold buyers in India. Indian consumers tend to convert gold purchases into equated monthly installments of three months or six months but Central Bank asked banks to stop accepting credit card for this kind of gold purchases. This affects most of the customers who enjoyed purchase and repay for it in longer term. Gold imports significantly decreased by 70 % and also compared to record high imports in May on the level of 162 tones. On the other hand some banks are trying to accommodate to new conditions. They try to buy gold on consignment basis and to keep it in places like Dubai due to the lower storing charges and bring to India by paying full money when required. Banks having such an infrastructure abroad would find this viable. Imports might rise again after the new arrangements are in place, said a sector official. Many also presuppose that demand in India traditionally pick up with the start of a series of Hindu festivals in August. Demand peaks during the festival of lights, also known as Diwali, in November.

The data about Chinese gold imports have been released last week. China imported 108 tons of gold and we witnessed the second largest import after the record level seen in March at 136 tons. China looks like heading to absorb over 50% of global gold output this year – and still rising. The reason why we did not witness a new record could be in the fact that gold is hold in strong hands for now and investors are not willing to sell at present prices. So far net imports through Hong Kong for the first five months of the year have totaled over 413 tons – double those of a year earlier when China imported just over 830 tons in the full year.

South Korea ranked 34th in gold holdings last month data showed Monday. South Korea’s gold holdings reached 104.4 tons. The country was ranked 56th in July 2011.

Gold sales from Australia’s Perth Mint declined for a second month in June. Sales of gold bars and coins totaled 49,460 ounces in June, compared with 92,781 ounces in May and 116,755 ounces in April. The similar situation is with the U.S. Mint which sold 57,000 ounces of American Eagle gold coins in June from 70,000 ounces in May and 209,500 ounces in April.

Matúš Pošvanc